Adair Turner: The Consequences of Money-Manager Capitalism

Yves here. This is a terrific interview with Lord Adair Turner, former head of the FSA. Most of it focuses on the things missed in contemporary economics, particularly macroeconomics, and how some disciplinary “back to the future” would be desirable.

A major topic of discussion is how wealth is becoming as concentrated as it was in the 18th century, and the driver then and now was the disproportionately large role real estate has come to play. Then, it was income-producing agricultural land. Now it is urban property, bid up by domestic and international elites who want to live in particularly prized cities. Turner points out the irony that access to cheap finance for housing, meant to help middle and lower income buyers, has instead contributed to rising wealth inequality. He also describes how the ability of banks and financial markets to supply virtually unlimited amounts of credit, against a limited stock of particularly sought-after locations, has the potential to create tulip-mania type results.

Perhaps due to time constraints, Turner didn’t venture into the views of classical economists, that profiting from land, which they derided as rentier capitalism, was economically unproductive. As Michael Hudson has stressed, they urged heavy taxation of land as the remedy.

An aside: Turner has an extremely plummy accent which he normally uses to theatrical effect. It isn’t clear whether the recording quality flattened that or whether he decided to tune his intonation a tad for North American listeners (not sure why that would be a plus, since a British accent is worth at least 20 attributed IQ points here, and the more obviously Oxbridge, the better).

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  1. Clive

    One of the most depressing things about British politics (this, it has to be said, is a very, very long list) and I suspect in the U.S. too because we’re all supposed to be worshipping at the same basic neoliberal wellspring is that politicians on almost all sides of the spectrum (Greens a notable exception) can get away — still — with coming out with such rubbish as “we’ve lowered interest rates which help [insert special-interest hot button group here] feel better off”.

    And, this is where the depressing bit comes in, that does persuade a lot of people. Of course, to “benefit” from the “low interest rates”, you have to leverage yourself up in some way. You’re supposed to do this, I guess, in order to acquire something of long term utility. What is actually happening is South Sea Bubble II and, as Yves said in the intro, you’re piling money into a fixed stock of generally unproductive assets (or assets with a limit to their ultimate productivity).

    Worse, if that were possible, I’ve seen this happen on at least three separate occasions in my lifetime (and I’m not that old). So even if we manage to somehow “fix” our current predicament, what really should happen this time round is that we fix it for good, not merely create a new paradigm which is just a cleaned up version of the last one. That I suspect will be a bit tricky to do. Still, we have to try…

    1. digi_owl

      Yep, it’s the basic conundrum. How to provide credit to productive enterprises (either to expand production or as a means of paving over lulls in the market) without the whole market turning into a massive Ponzi scheme.

      One potential way would be to put a hard cap on leverage ratios. But that favors people with inherited wealth as they can always outbid those on a earned income.

      1. Ben Johannson

        Forbidding banks from selling their loans to a third party would be a big step in the right direction.

  2. AllanW

    The horrible mid-Atlantic slur he adopted here is probably the result of his spending more time in the States lately combined with his desperate need to be loved by whatever audience he plonks himself in front of.

    Turner is speaking at our event today in London so we’ll see whether the newly-acquired accent has survived the ‘plane trip …

    1. Clive

      All of which begs an interesting question: if (as you not without merit say) previously asleep-at-the-wheel regulators like Lord Turner now pop up and tacitly ‘fess up to their sins (sins of omission) and say things along the lines of “this was mucked up before, this is how is happened, this is why it happened and this is not something we can have happen again” do we now either:-

      a) put on a kabuki theatre of (perhaps genuine, perhaps somewhat affected) outrage and refuse to support any such moves; or

      b) take help from anywhere we can get it even if we have (maybe well-founded) doubts about the source of that help ?

      Like it or lump it, people don’t pay the slightest bit of attention to Clives and AllanWs commenting on a blog (you can argue for a butterfly-flapping-its-wings-in-Haslemere-causes-a-hurricane-in-Bermuda effect, but that is by no means a guarantee). Even Yves is at best a caterwauling from offstage. Turner gets more attention. From my perspective, if he’s gone over to join us on the dark side, that’s fine by me.

      1. AllanW

        I’m sufficient of a pragmatist to answer “b)”, for the reason you mention, as well as being sufficiently brutal to do so only on the basis of ‘horses for courses’. In the same manner as I employ, work with and happily interract on a daily basis with good storesmen or valuable sales specialists who I know to be mildly racist or incurably ignorant of egalitarian objectives, I’ll smile and applaud Turner in his current incarnation with INET whilst never forgetting his incompetence as head of the Fundamentally Supine Authority.

        The kabuki theatre antics of ideological purists nauseates me.

      2. OpenThePodBayDoorsHAL

        Similar to Cameron’s kabuki piece, “I will not pay the EU on December 6th!” which of course means that he will pay on the 5th or the 7th but he knows full well that the split-second attention span and vanishingly tiny cognitive powers of his electorate allow the rule by this simplest of parlour tricks, just so billionaires can gorge while millions starve. “The best lack all conviction while the worst are full of passionate intensity”.

    2. Jim A

      Agreed, it’s probably not an intentional shift….Although if it was, one wonders whether that 20 IQ point boost that Yves alluded to holds in Canada.

  3. Moneta

    In the last few decades, we’ve gone from 3.5 to 7 billion people on this planet. And we can expect this to go past 9.

    Here is North America, we are living as if our materialism is a right. But what if our way of life has to shrink its energy consumption by let’s say 50% per capita over the next couple of decades? This would mean our infra and housing stock are totally wrong for what is coming our way. Yet, if you look around there is NO sign that we are mentally preparing for this. We are all living as if emerging market will keep on exploiting their resources, until completely depleted, never expecting a payback. Maybe the destruction of the middle class is a sign that this 50% cut is slowly working its way through our economy. Poverty would certainly work its way up in a shrinking economy.

    If this were the case, then we would have to hurry and quickly get our economy off materialism. But good luck with that, abundance is too ingrained in the American psyche.

    1. susan the other

      Lately I’ve been judging posts by what is not said. There are some educated opinions out there that do not mention global warming, let alone Fukushima or overpopulation, etc, and it has struck me that this is meticulously intentional. It looks like head-in-sand, talking about no true solutions and analyzing the situation as if it really didn’t matter what happened and anyway it has all happened before. The avoidance of the environmental issues is usually intended, as I think happened above. Basically, nobody knows what to do. Perhaps the most benign thing, which remains unspoken because it is such a shock to capitalism, is that, as Turner says about EU austerity, there really is no way to deal with the debt except lowflaltion for a long time. He didn’t break it down for a reason, I’m sure.

      1. OpenThePodBayDoorsHAL

        We just had the hottest September ever recorded globally but if you just looked at the press you’d think the situation was the exact opposite. Maybe when Manhattan is under a metre of water? Goldman would probably just supply company lifeboats for commuting and make sure everyone was on the second floor.

    2. James

      Maybe the destruction of the middle class is a sign that this 50% cut is slowly working its way through our economy. Poverty would certainly work its way up in a shrinking economy.

      Nice observation. That’s exactly what’s happening. Like a bad drug habit, about 90% of us or so are about to ditch the materialism habit the hard way, which ain’t gonna be pleasant for anyone, even the 10% who depend on our debt-enabled spending. And then, as you say, it will work steadily up from there. And then we’ll see how long the increasingly isolated rich can defend their castles built on the backs of the rest of us. Should make for a real page turner.

  4. cnchal

    The very rich buy multimillion dollar, pound or euro palaces in London, Paris, New York and elsewhere for no one to live there.

    The Chinese build cities that can house millions of people, and no one lives there.

    Both groups, the very rich, and Chinese “house buyers” use the same rationale for this behavior.

    Because “Arbitrary token of wealth”.

    Interesting points made about Facebook and not requiring much money to create a lot of wealth, with wealth being defined as the present value of all the outstanding shares. Granted, Facebook requires no land, warehouses or conventional machinery to operate. What Adair doesn’t mention, or tie back to, is the point made about the banks being able to conjure up practically limitless amounts of borrowed money. That limitless borrowed money is the main reason Facebook, and the rest of the stock market is “worth” what it is.

    1. Jim A

      I think that it’s important to note that “arbitrary token of wealth” isn’t, I think, meant to imply that these properties are intended as conspicuous consumption….In fact, I suspect that for some people they are the .01%ers equivalent of a bunker filled with guns and kuggerands….The intention is for them to be inconspicuous enough that if everything goes to heck back home they can serve as a bolthole and/or store of wealth beyond the reach of a future confiscatory regime. When he say “arbitrary token,” I think he is referring to the fact that the prices are at some level arbitrary and driven by a very narrow and changeable demand.

      1. Moneta

        Houses can be a store of value OR a money pit. It all depends on the times and regime. Fore example, when all those with extra discretionary income live in the same cluster, it’s much easier to confiscate wealth… just tinker with muni tax rates.

      2. cnchal

        I think he is referring to the fact that the prices are at some level arbitrary and driven by a very narrow and changeable demand.

        The definition of arbitrary is:

        1. founded on or subject to personal whims, prejudices, etc; capricious
        2. having only relative application or relevance; not absolute
        3. (Government, Politics & Diplomacy) (of a government, ruler, etc) despotic or dictatorial
        4. (Mathematics) maths not representing any specific value: an arbitrary constant.
        5. (Law) law (esp of a penalty or punishment) not laid down by statute; within the court’s discretion

        The super wealthy use these palaces to park “wealth” just like the Chinese that buy homes in an uninhabited city, and has nothing to do with prices.

        These same two groups of people, could have arbitrarily chosen to hold gold bars, or pallets of cash, but it would be no fun to point to those and say “look at what I got”.

        BTW, I agree with your contention that the super rich use these palaces as a bunker in case the sky falls back home. That little bit of utilitarianism justifies it for them.

        1. Jim A.

          Of course the problem is that if they don’t have other wealth to hand after confiscation, they have to sell the RE. And if everybody is selling the super-luxury condos at the same time…..

      3. OpenThePodBayDoorsHAL

        Don’t forget that you can rock up with a suitcase full of cash and buy a house, no questions asked, try doing a bank wire transfer for $10,001.00 and see how much they want to know precisely where you got the funds.

    2. digi_owl

      I have noted as of late that economists in general seems very hung up on “wealth” creation.

      Recently i took a small part in a twitter exchange, and it got me thinking that the earlier value focused economics was on to something, but they lacked the deep physics to really defined value. It all seems to have ended with Ricardo and Marx arguing over “labor theory of value”, when frankly labor is just another case of energy transformation.

      As such, what if we go back to value, but talk about value as energy? A “energy theory of value” basically.

      At its core, all food is grown (we eat a mixture of grown plants and animals fed on grown plants). And this growth is fueled by the energy provided by the sun.

      And machinery is driven by much the same energy (fossilized plant matter, solar, wind, etc).

      The only energy source right now that “breaks” with this is nuclear fission. And it is a close relative to the fusion that is driving the sun.

      It really becomes a lovely rabbit hole once one start exploring the notion.

  5. mossmoon

    What garbage. What you call “economics” is really just the flow of energy, the direction of which has nothing to do with the theories of these pretentious, circular-reasoning windbags.

    1. beene

      On one level agree as economist definitions often not the same as political one’s. Still politicians often make policy decisions based on what ever the economic theory of the day, which do affect the real world.

    2. Xelcho

      I for one am inclined to agree with you Mossmoon. Trained as a civil engineer, I have had many many debates with the likes of these people over their “data”. Do I need to even mention that virtually all of it is abstracted data and the conclusions are based upon abstracted comparisons. Further, almost none of this stuff is “stackable” meaning that there is no meaningful axioms upon which more complex thoughts can be built. In short, an overabundance of opinion and almost no substance.

      BUT… All of this is describing human behavior and how people/corporations make and save money, not physical sciences. I have yet to see anything coherent, reasonable or fair in the stratification of these activities. Clearly the governing/regulatory policies over the money portion are almost all designed from the ground up to concentrate, not distribute coupled with acrobatic language to the contrary.

      1. James

        BUT, all the money stuff is based on the underlying energy, and little more. Economics is a pseudo science, always has been, always will be. The very concept of “value” is an entirely ephemeral and arbitrary human construct, variable from moment to moment, person to person, and culture to culture.

        That said, you’re certainly right that all this is about justifying continued concentration of wealth. That’s really the final frontier these days, as western capitalism closes its net on everything, isn’t it?

  6. Carla

    My mother, grandmother and great-grandfather were all staunch Georgists. They would certainly nod in recognition were they here to hear Adair Turner.

  7. NV

    As someone who did a bit of pond hopping back in the day, my chief observation on the ‘kabuki theatre’ aspect of Adair is that he trained himself to gesticulate, crucial to what another reader thought of as a mid-Atlantic performance.

  8. Fíréan

    All ‘ extraordinary phenomenon’ and ‘irony’ with this so called Senior Fellow at the Institute for New Economic Thinking.
    No reference to his nor his predecessor’s tenure as chairman of the FSA ( Financial Services Authority). the failings of that institution and the continuing effect of too big to fail or jail.
    At the end he does refer to himself as being a member of the “liberal elite”.
    And from the interviewer : “The worst of the European crisis has passed. . . Spain seems to be booming”
    Does the decor of the room feed their own dillusion of credibility ? The accents don’t make for anything.

    phe·nom·e·non :
    something (such as an interesting fact or event) that can be observed and studied and that typically is unusual or difficult to understand or explain fully.

  9. Edward J. Dodson

    There are good answers to our supposedly modern problems in the writings of political economists of the past, in particular the writer Henry George. Mr. Turner rightfully introduces the importance of land markets to the economy. What he does not remind us is that property markets have always been cyclical. The historical data reveals an 18-year land market cycle, subject, of course, to externalities that extend or contract the cycle and influence the height in prices of land and the duration and depth of the subsequent crashes. What Henry George observed is that absent the societal collection of the annual rental value of land, owners enjoy an imputed (or actual) income stream, capitalized by market forces into a selling price for land. In the United Kingdom, the Liberals campaigned during the first part of the 20th century for an imposition of a tax on land rent that would have had important constructive consequences on the British economy. Read what Philip Snowden had to had on the subject, or Winston Churchill’s speeches delivered during his 1909 Parliamentary campaign.

    Economic theory for most of the last century has asserted without good explanation that the market for land operates in same manner as markets for actual capital goods. The real world confirms this assertion is wrong. Absent the full public collection of the rental value of land, land is both hoarded and acquired purely for speculation rather than productive use. Thus, price does not clear the market for land; rather, rising prices may under some circumstances result in a net loss of supply brought to the market (i.e., a leftward leaning supply curve). This does not happen with respect to capital goods or even credit.

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